Types of Land Investments
Independently wealthy people can purchase land for personal use, recreation, and yes, investment. Unfortunately, most people do not fall into this category. This begs the question: Are land-ownership opportunities and business ventures capable of generating an acceptable return on investment for small investors, while still affording them the joys and attributes associated with land ownership? To answer this question, you need to be able to evaluate 10 general categories of potential land investments:
- Residential development land
- Commercial development land
- Row crop land
- Livestock-raising land
- Mineral production land
- Vegetable farmland
- Recreational land
Residential and Commercial Land Investments
Residential and commercial land development offers a feasible entryway into investment because virtually an unlimited number of land development opportunities can be structured to meet an investor’s capital and time constraints. For most small investors, real estate investment trust (REIT) ETFs are an ideal choice because they do not require direct management, they are broadly diversified by property type, they are geographically diversified, they can be purchased or sold on a real-time basis, and they are very inexpensive. Some specialize in a type of real estate, but others, such as the Vanguard REIT ETF (VNQ), provide diversified exposure to industrial, office, retail, healthcare, public storage, and residential property developments
Unfortunately, these types of investments negate the ability of the landowner to enjoy using the land. Therefore, residential and commercial land developments are not feasible options for people that want to truly experience the feeling of land ownership.
Land purchased for row-crop farming or for running a livestock operation affords the ability to enjoy land in the homeowning sense, as well as from the standpoint of generating income. However, there are a host of problems for small investors who purchase land in order to operate these types of enterprises. First, the scale required to operate a row-crop operation or livestock operation has to be very large to be financially viable. This, in turn, requires a significant upfront capital outlay far beyond what most people can afford. Moreover, the ongoing fixed costs associated with running these types of farming operations are extremely high.
While owning a traditional row-crop or livestock farming operation is probably not feasible for most small investors, many agricultural investment options provide acceptable investment exposure to traditional farming enterprises. For example, some funds provide exposure to soybeans, corn, wheat, cotton, sugar, coffee, soybean oil, live cattle, feeder cattle, cocoa, lean hogs, Kansas City wheat, canola oil, and soybean meal. Therefore, by investing in this product, small investors will have broad investment exposure to traditional farming operations. This, in turn, can be used by the investor to help keep abreast of traditional farming practices, as well as to generate an attractive return on investment over time.
Small investors can also utilize a variety of exchange traded notes (ETNs) to invest in specific types of traditional farming operations. For example, the iPath Bloomberg Agriculture Sub index Total Return ETN (JJATF) provides investment exposure to soft commodities such as corn, wheat, soybeans, sugar, cotton, and coffee, and the iPath Series B Bloomberg Livestock Sub index Total Return ETN (COW) provides investment exposure to cattle and hogs.23
Small Farm Investment Opportunities
For small investors to truly enjoy the more traditional sense of land ownership, perhaps the best options are timber farms, mineral development lands, vegetable gardens, orchards, vineyards, and recreational land. These types of agricultural endeavors are much more attractive to small investors: The scale of the land purchase can be tailored to meet the investor’s capital constraints; operations have the potential to generate an ongoing income stream, and investors can enjoy being on the land while it is being used.
With that said, a host of ETFs and ETNs also are directly tied to these types of farming endeavors. Therefore, small investors may want to consider investing in them, if they decide that running a small-scale farming operation requires too much of their time and resources.
Issues to Consider
Once the decision has been made to purchase raw land as an investment or for development, investors need to understand many issues about the legalities associated with the use of specific parcels of property. For example, land-use restrictions may curtail the manner in which the land can be used by the owner, land easements may grant access to a portion of the property to an unrelated party, and the conveyance of mineral rights may grant an unrelated party the authorization to extract and sell minerals for financial gain.
General Overview of Land Valuation
Investors considering a raw-land purchase need to realize that they are engaging in a purely speculative investment. This is because undeveloped land does not generate any income, and therefore any return on investment will have to come from the potential capital gain that may be received once the land is sold. With this in mind, the cost of debt for a farm real-estate loan can be used to help conduct a preliminary investment analysis.
If the cost of debt for a farm real-estate loan does not dissuade small investors from wanting to purchase land as a speculative investment, and they truly believe they can establish a small farming operation that will meet their capital requirements, income requirements and time constraints, many valuation reports are readily available. These reports can be obtained from the agricultural departments of public state universities to help assess the feasibility of establishing a small-farm business operation. Therefore, small investors that want to establish a timber farm, vegetable farm, vineyard, or orchard should be able to find a comprehensive and timely analysis that explains how to establish these types of operations, the amount of work they will likely entail, the capital outlay required, the length of time necessary to receive a return on investment, and the likely return on investment that the small-farm operation will achieve over time.
Finally, and perhaps most importantly, investors need to understand that investing in land to operate a small-farm business enterprise is likely to be the most difficult and risky type of business venture that can be pursued. This is because, in addition to the risk found in all business endeavors, farming operations take on a host of risks that non-farm businesses do not have to deal with. Examples are the threat of a variety of crop diseases, the potential for pest infestations, an ever-changing weather environment, and unstable market prices. For these reasons, coupled with the fact that operating a small-farm business takes a significant amount of physical strength, stamina, and a very strong work ethic, the vast majority of investors will not likely be able to handle all of the farming demands on a sustainable basis.
Buying raw land is a very risky investment because it will not generate any income and may not generate a capital gain when the property is sold. Moreover, utilizing a farm real-estate loan to purchase land is very risky. With these points in mind, it is recommended that most small investors with a yearning to own land or operate a small farm business should utilize the wide variety of ETFs and ETNs which are now made available to small investors that were once only available to hedge funds. By utilizing these types of investment products, investors should be able to fulfill their desire for land-related recreational activities while generating a reasonable return on investment over time.
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